Producer inflation in the US increased significantly in July, moving faster than expected. The Producer Price Index (PPI) for final demand rose by 3.3% compared to last year, exceeding the forecast of 2.5%. This spike followed a 2.4% increase in June. Meanwhile, the core PPI also climbed to 3.7% annually, up from 2.6% in June.

Monthly Producer Price Changes

Monthly, both the PPI and core PPI increased by 0.9%. Consequently, the US Dollar Index stayed positive at 98.04, up by 0.25% on the day. This surprising producer inflation report alters our short-term view. We now need to prepare for a firmer stance from the Federal Reserve, as this data suggests that inflation isn’t fully under control. Hopes for interest rate cuts in late 2025 or early 2026 now seem less likely. We are purchasing put options on major stock indices like the S&P 500 for the upcoming weeks. The CBOE Volatility Index (VIX), which has stayed low around 14 for much of July, is a primary focus for us as we expect increased market uncertainty. This situation mirrors the volatile markets of 2022 when similar inflation surprises caused sharp declines in stocks.

Bond Market Response

In the bond market, we are shorting 2-year Treasury futures, anticipating further increases in short-term yields due to expected Fed tightening. The CME FedWatch Tool shows that the likelihood of a rate hike at the September FOMC meeting jumped from 15% yesterday to over 45% this morning. This swift shift indicates that bond prices, especially at the front end of the curve, could fall further. The strong US Dollar Index signals us to add long positions against other major currencies. A hawkish Fed makes the dollar more appealing, similar to the trend we saw during the aggressive rate hikes that began in 2022. We are particularly focused on shorting the euro and the yen, as their central banks are unlikely to match the Fed’s renewed determination. Now, we are closely watching the upcoming Consumer Price Index (CPI) data. If the CPI report confirms rising prices, it will strengthen the argument for the Fed to keep a tight policy for a longer period. We will use options to safeguard our portfolios against a significant market drop if that data comes in strong. Create your live VT Markets account and start trading now.

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